Solar home system trending in India as future energy for electrification

A few years ago, the hundred or so residents of Paradeshappanamatha, a secluded hamlet in the southern Indian state of Karnataka, gathered along the central pathway between their 22 densely clustered homes, and watched as government workers hoisted a solar-powered streetlamp. As the first display of electricity in the town, it was an object of mild interest, but, being outside, the light didn’t help anyone cook or study, and only attracted moths.

Still, when B. Prasad arrived two years later to encourage people here to abandon kerosene lighting for solar-powered home systems, people had some idea what he was talking about. What sounded preposterous to the village residents was the price. Mr. Prasad, an agent for Solar Electric Light Company, or Selco, was selling a panel and battery that would power three lights and an attached socket for phone charging for approximately 12,800 rupees, or $192.

“There was no way we could afford that,” P. C. Kalayya remembers thinking. He and his neighbors rise early in the morning to walk miles along a nearly impassable dirt road to work on coffee, pepper and betel nut plantations. Mr. Kalayya earns $3 a day — he’d been earning $2.25 until a raise came through this year — and half his wage is withheld by his employer as repayment for various loans.

And yet, despite what seemed on its face an impossibly high cost, Selco agents succeeded in persuading Mr. Kalayya and 10 other village households to make the switch. Now, his wife can better see how much spice she is putting in as she cooks, and Pratima, their 18-year-old daughter, can study long after dark.

The idea behind Selco, and other companies like it, is to create a business model that will help some of the 1.2 billion people in the world who don’t have electricity to leapfrog the coal-dependent grid straight to renewable energy sources.

About a quarter of the world’s off-the-grid people, or 300 million or so, live in India, mostly in remote, rural communities like Paradeshappanamatha, or in informal urban settlements. Hundreds of millions more get electricity for only a few hours a day. Prime Minister Narendra Modi has pledged to achieve universal electrification in India by the end of 2022. His main effort is adding hundreds of new coal plants, which have contributed to near-apocalyptic pollution levels across large swaths of the country.

On the other hand, Mr. Modi has also promised investments that would significantly increase production from renewable sources. Partly to that end, Mr. Modi and President François Hollande of France started an “International Solar Alliance” during the recent climate talks in Paris. With an initial pledge of $30 million from India, Mr. Modi said that the eventual goal was $1 trillion in global funding for solar technology development by 2030.

Solar power accounts for just 1 percent of India’s current electricity production, mostly through large plants that contribute power to the grid, but a generation of Indian energy entrepreneurs is out to prove that a faster, cleaner and ultimately more economical route to universal electrification is through solar home systems.

“Why is it always about a grid?” asked Harish Hande, a co-founder of Selco India. It was one of the first of more than 40 companies now offering solar home systems in India.

Selco systems typically include a small panel connected to a battery that stores enough power to run one or more lights, phone chargers and, with higher wattage options, some small appliances. Since its inception in 1995, Selco India has sold 318,400 solar home systems, and has provided power systems to almost 10,000 schools, hospitals and other institutions, almost all in Karnataka.

“Solar home systems have been around for a long time by now, and they are a successful model,” said Robert Stoner, the director of the Tata Center for Technology and Design at M.I.T., which works directly with Selco and others, including the Indian government, on renewable technology development. “Their challenge is that they cost a lot — far more than the average person has, even a relatively well-off person.”

So if it is difficult to persuade a middle-class family in an industrialized country to invest in solar, how do you persuade a family that lives on a couple dollars a day?

Mr. Prasad is a consummate salesman who talks a mile a minute, wears his hair in a side-part and keeps three pens in his breast pocket. On his home turf in the villages of the Chikkamagaluru district in Karnataka, his salesmanship is put to the test. If he can manage to interest people in what is often an unfamiliar technology, he then pitches his potential customers on the more mysterious, but crucial idea of financing.

For two decades, Selco has worked to persuade a network of banks to provide financing options to poor people who were typically seen as too risky. As Mohan Hegde, the company’s operations manager, noted, “The idea behind Selco is to take a poor man to the bank and see if what he can afford to pay per month is acceptable to the lenders.”

The sales presentation, once it includes assurance of financing from a bank, is much more palatable to potential customers: Pay the bank monthly installments of roughly the same price you’d spend on kerosene, and in a few short years, you’ll own the system and your basic energy needs will be fulfilled by the sun free.

“When we say free, their ears prick up,” Mr. Prasad said.

Without financing, decentralized renewable energy could never compete in India with kerosene, which is cheap because the government subsidizes its sale at a cost of more than $5 billion a year. Use of kerosene contributes to carbon emissions, but also to more personal and immediate hazards like skin irritation, respiratory problems and a significant fire risk. Ultimately, it provides only dim, flickering lighting.

For many of Selco’s customers, financing the solar home system is their first interaction with a bank. The experience is often new for the bankers, too.

“Honestly, I had never even heard of Paradeshappanamatha, and beyond that I’ve never dealt with financing such small sums,” said Shahanaz Ali, the manager of a branch of the Kaveri Grameena Bank, where Mr. Kalayya and his neighbors eventually opened accounts. “I’m very new to this job, so taking risks with these kinds of people is worrisome. They have no collateral, so I have no security in giving individual loans.”

Ms. Ali telephoned a superior based in a nearby town who had interacted with Selco customers before, and he reassured her that very few defaulted. He offered her an idea for financing that Selco had used for other remote villages.

“I created what’s called a ‘Joint Liability Group,’ ” said Ms. Ali. “In the J.L.G., we give a loan to a group, and each member acts as another’s guarantor, so therefore if one defaults, the whole group does, too.”

Through the cooperation of hundreds of banks like Ms. Ali’s, Selco effectively shifts financial risk away from the customer, and away from its own investors. By and large, the risk to the banks has been worth it — 7.4 percent of Selco’s hundreds of thousands of customers have defaulted. But each new bank needs to be persuaded to participate, and so salesmen like Mr. Prasad can’t promise customers financing from the get-go.

“The banks are only with us because we are relentless about our business model, and the only reason we can be that way is because we have wonderfully patient investors,” said Mr. Hande.

Selco’s three investors are foundations, two European and one American, that function like venture capital firms, but emphasize social impact rather than profitability. Selco’s margins are only around 3 to 4 percent; net profit was just $62,500 in the 2013-14 financial year.

Other solar home system providers in India, as well as in Africa, have steered clear of the arduous bank-centric model and opted for pay-as-you-go plans, similar to prepaid cellphones. The user pays a shopkeeper for a certain amount of electricity and essentially rents the system.

“In the pay-as-you-go model, the company is forced to own all the capital, so they end up with this incredibly large balance sheet and take on a lot of investor risk,” said Mr. Stoner, the director of the M.I.T. research institute. “On the other hand, it does allow individuals to get the benefits without having to take on loans.”

Mr. Kalayya’s family hopes that their solar home system, with its lights and phone charger, is only the beginning. Pratima, who is one of four people in the village to have attended school, said that getting bank accounts and understanding loans had broadened her family’s sense of possibility.

“The faster we pay off this loan, the more likely we are to get another one,” she said.

Ms. Ali, the banker, had offered families in Paradeshappanamatha a minimum monthly payment of 350 rupees, or about $5.30, but after a group discussion, the families decided to make spending sacrifices so as to pay 500 rupees per month. They had seen electric appliances in town that could improve their lives.

“We still have to do manual grinding of grains and spices,” Mr. Kalayya said. “It takes up a lot of time. The next loan can be for a machine that will do this.”

The solar home system, or S.H.S., model has steadily grown as the technology becomes more affordable. A report released in early 2015 by the Climate Group, an international nonprofit working toward a low-carbon economy, together with Goldman Sachs, estimated that the 40 to 50 S.H.S. providers in India were on track to sell at least five million solar home systems in India between 2014 and 2018. The report added that “better models for consumer finance alongside large demand and rising incomes,” along with projected growth in per-capita income, could expand that number to around 7.2 million households, or more than 30 million people, by 2018.

If true, solar home systems would still account for only a minuscule proportion of India’s electricity supply, and profit margins for providers would remain in the low single digits.

The scale of the S.H.S. business model depends on its adaptability to dense, urban areas, where homes are often makeshift and temporary, and where almost all of the net growth in India’s population is projected to occur. Many urban migrants have no legal rights to live where they do, which leaves them vulnerable in countless ways, including the inability to demand electricity from the public grid, or, for that matter, to have access to the kerosene subsidy.

In a cluster of around 70 hovels made of scrap metal and plastic about an hour’s drive through bumper-to-bumper traffic from Selco’s headquarters in Bangalore, the company is trying out a model specialized for urban, landless people.

The ramshackle settlement doesn’t have an official name, and the Bengali-speaking migrants who live there refer to the place as “near Hebbal flyover,” referring to a nearby overpass.

Mosidul Haque says he came to the settlement three years ago from a town in the state of West Bengal, 1,500 miles away. He now roams Bangalore for recyclable material, which he puts into giant burlap sacks tied to a bicycle that he uses as a cart. He makes an average of 300 rupees a day from a middleman who buys the scrap.

Mr. Haque used his savings to open a small stall selling cigarettes and tea, and when Selco scouted the settlement, they identified him as a possible operator who could run a pay-as-you-go-style business for area residents.

Based on the number of people living in Mr. Haque’s vicinity, Selco provided him with two large solar panels to put on the roof, 32 power storage batteries and an equal number of single-bulb lamps to rent out. Mr. Haque now sells electricity from the batteries by the hour. He also fully charges phones for 5 rupees, or about 8 cents, saving his customers trips to distant charge shops whose owners they don’t trust, where they would have to stand guard for the duration of the charging.

He gets paid 1,000 rupees a month, or about $15, by Selco to serve as an operator, and also earns on the batteries and phone charging. But each month, he must pay 4,000 rupees as an installment toward the 80,000-rupee price, or $1,200, of the entire system, which is owned by Selco until the payments are complete. Very few banks would lend to itinerant workers like Mr. Haque, whose assets and livelihoods are so vulnerable, so this model shifts risk back onto Selco and its investors.

The risk is not just that Mr. Haque will come up short. This November, he returned from visiting his home in West Bengal to find that one of the solar panels had been stolen. He’d rather not inform the police; he says they already see the migrants as thieves, and look for excuses to evict them. Selco’s investors will cover the cost of the panel, and the replacement is going to be installed on a higher pole.

Running a solar business in an informal settlement like “near Hebbal flyover” involves a thicket of problems. Mr. Haque worries about whether his home will be razed or if he’ll be able to generate electricity during the long weeks of monsoon rains, or dense winter fog, when lighting is more important than ever. And when your customers are living hand-to-mouth, just collecting payment is a daily frustration.

“People take mobile charges and light payments from me on credit, and then they never pay,” Mr. Haque said. “When you go and ask them for the money, it always turns into a fight. People here get a chance to loot and before you know it, your money is gone.”

While Mr. Hande, Mr. Stoner and others try to iron out problems like these, they acknowledge that solar home systems don’t represent a complete solution to energy poverty, if only because it is so intertwined with the precariousness of the lives of his customers.

“With S.H.S.’s, at the end of the day, you are just replacing an existing cost with a better technology,” Mr. Stoner said. “Having electric lighting at home might allow a child to study for longer hours, so you are introducing an indirect productivity benefit, but it doesn’t help you pay next month’s loan.”

“Still,” he said, “that first kilowatt of electricity someone gets is worth an awful lot because they go from darkness to light, with a very small amount of energy.”

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